Monday, July 9, 2012

Traders Edge- 7-9-12... Risk Off, Look out Below


The stock markets in the U.S. are set to open lower, following stock markets around the World. The risk off trade that began on Friday, following the release the disappointing jobs report, looks to continue.



Market pundits and writers are talking more about the possibility of recession in the U.S., which we think is unlikely at this point provided that monetary aggregates show continued growth, albeit growth at or near stall speed. We think this points to a slowing in the economy, but not a recession just yet. Surprisingly, the U.S. dollar index is trading down in early morning trading, as both the Euro and Yen are trading up versus the greenback.

Some quick chart reviews----


As shown in the tables above, the Asian markets are trading lower with both the Nikkei and Hong Kong Indeces off by more than 1%. The chart above shows the Ishares FTSE China 25 Index. The index has been trading in a sideways to a slightly positive path since the end of May. This trading action has been on light volume versus the downside action earlier in May. Despite a rising MACD, the RSI has flattened and the stochastic is an overbought range. The index may retest the recent lows around $32, where investors should get more information about the path of the Chinese stock markets.




As for the U.S. markets. the SPY shows a similar technical pattern on the RSI, MACD, stochastic, and volume characteristics. This setup, and our economic views, leads us to conclude that the market will be range bound.

Although its prominence has diminished in recent years, Alcoa (ticker AA) kicks off second quarter earnings season this evening. The Consensus is looking for $0.06 EPS on revenue of $5.8 billion, both down from the year ago period. EPS estimates for AA's second quarter have been declining over the last three months, suggesting expectations have already been tempered for the company. Although we have not researched the fundamentals of AA and the upstream/downstream aluminum industries in some time, we think the technical picture looks interesting, and note that shares have traded largely flat for close to year (although in 30 percentage range) and our long-term technical indicator looks positive. Trading action versus AA's results may be a telling sign of things to come for the economy and investment markets.

AA's chart


Our long-term technical indicator for AA's shares- in this model a low indicator is a positive occurrence.


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